How are manufacturers feeling about Brexit?

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Shortly after the referendum, we conducted a quick survey of manufacturers to gauge how the sector was feeling about the outcome. Companies were pretty keen to give us their views with over 400 responding within just a few days. Here we chat about our findings:

Economists had predicted the sky would fall in if we voted to the leave the EU, it doesn’t seem to have done that. Are manufacturers pretty relaxed about it now?

It’s been three weeks of keeping calm and carrying on.

Many might have been surprised by the outcome, but that hasn’t led to much change in actual trading conditions. Our survey shows that between around 80% of manufacturers either haven’t seen any change in orders or enquiries or reckon it’s too soon to make a judgement. 

Phew, that’s a relief. So it’s just business as usual?

Not quite. This is now, but in six months manufacturers aren’t so relaxed about it still being business as usual.

A balance of companies expect falls in orders from UK and EU customers, over the latter part of this year. If this materialises, it would mark the end of an improving picture that was been reported in the first half of the year.

On the upside, there is still some confidence about growth in sales to customers in non-EU markets.

 

6mthchange 

 

Are EU customers going to boycott us now?

No that’s not it (I hope).

It’s more about the implications of the referendum outcome on the emerging recovery across the EU. Just a few months ago about half of the companies we surveyed said they were seeing more positive growth signals from the EU market after years of sub-par performance. Organisations, such as the IMF have already pushed down its forecasts for growth in the EU this year, which would have knock on consequences for demand for UK goods and services.

It may be the case in future that EU customers want to keep their supply chain in the EU, but I don’t think we’d be able to pick that out of any short term data.

What about the exchange rate, everyone reckons the fall in Sterling is great for manufacturers?

Indeed. Going on some reports you’d be forgiven for thinking that this was the only economic variable that mattered to manufacturers, but as we’ve pointed out (more than once in the past), it’s just not that simple.

So here are some survey stats:

  • 53% say that the weaker exchange rate is currently an opportunity arising from the referendum.

  • But, 75% also say that exchange rate volatility poses a business risk.

  • A third of companies have already seen input costs rise, and 51% expect to see input price increase in the next six months.

  • Looking over a longer time frame, if Sterling stayed a current levels against the dollar that would be positive for 40% of manufacturers, but negative for 34% (see chart).

sterling  

 

Really, it must be good for someone?

Of course, the more export intensive companies are, the more positive they are about a lower Sterling for longer. And there is a fair bit of sectoral variation too with transport, metal products and electrical equipment set to be bigger winners.

OK, so we’ve got concerns about demand, possible price increases and an unpredictable exchange rate, what happens now?

Well, you know the old saying that uncertainty is the enemy of investment? That looks like it could play out in the next year. Around 56% of companies now plan to review their recruitment and investment plans in light of the referendum outcome, with one in six hitting the review button immediately.

Clearly, not all companies have total clarity on what this will ultimately mean – especially as there is a lot to do to sort out a new relationship with the EU – but the best guess is that 43% will press on with current investment levels, 38% will likely reduce capital expenditure and 9% will increase it. Interestingly, there isn’t much difference in responses between UK and foreign-owned companies.

OK, this isn’t sound too good.  Does that mean we’re headed back to deepest darkest recession?

It depends. What we have here is a snapshot of sentiment in the immediate aftermath of the referendum. We know there’s been a dip in consumer confidence, from a reasonably strong starting point. We’ve seen some negative numbers emerging from the construction sector even before the referendum, and this affects parts of manufacturing. And the impact on the EU economy is still a known unknown, although the exchange rate may yet provide something of a boost. 

We’ve forecasted a number of scenarios for manufacturing, all of which would see the sector remain in recession until the end of 2017. But the magnitude of the decline will depend on how the factors above evolve.

Hmm, no disrespect, but economists have been really wrong about this stuff before…

That’s fair. But you’ll need to come back tomorrow, when we’ll explain our forecast scenarios in more detail.

So, you’re hedging your bets somewhat. Moving on … we’ve got a functioning government now. Surely that will make a difference?

I think it will. One of the big risks identified by manufacturers over the next 12 months was political uncertainty. We got a newly formed administration, together with some machinery of government changes which outline a new emphasis on international trade and industrial strategy.

And we’ve got a department in place to deal with the Brexit negotiations. But there’s still a tonne of detail that needs to be worked out on EU trade, access to skills, regulation, grant funding and so on. So political uncertainty is still likely to be right up there as a concern.  

 

risks 

 

Let’s finish on a positive. Any good news?

Always. My glass is always half-full when it comes to manufacturing.

Yes there are lots of risks and issues – when aren’t there risks and issues if you’re a globally focused business? Before the referendum the sector was on the way up again after a tricky 18 months. We’ve seen lots of investment, a strong focus on developing new products and services, an appetite to get into new export markets. That ambition, will ultimately stand the sector in good stead in the months over the long term.

You can read more about our survey here

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Chief Economist

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